Tales of shrewd investors who snap a bargain and make huge profits by flipping foreclosed homes is quite widespread. So, it is no surprise that prospective homebuyers who are looking to buy more house than their budget would find buying a foreclosed home quite enticing.
However, is it a good idea to buy a foreclosed home? The answer will depend on many factors as there are always benefits and pitfalls in a real estate investment.
Let us take a closer look at the ins and outs of buying a foreclosed home to help you decide if it is a smart investment for you.
What are the three different stages of a foreclosure?
Before starting your search for a foreclosed home it is wise to know where exactly it is in the foreclosure process.
- First stage is pre-foreclosure or “short sale”. This is when the buyer can purchase the home directly from the homeowner who cannot pay his mortgage payments and has a 90- day notice before the lender claims his house.
- The second stage is foreclosure where the lender reclaims the property from a homeowner who cannot pay back his mortgage and puts it up immediately for auction.
- The last stage is the post-foreclosure. This is a property that a lender, government agency, or government loan insurer owns if the property does not sell at the foreclosure auction. It is also known as REO (real estate-owned property). It is then put up for sale by the lender to get back the investment it had made.
- Foreclosed homes are always sold for a much cheaper price than the original market rate. This is because lenders can make a profit only if the home gets sold quickly.
- Pre-closure sellers are motivated to sell the property which means that you may be able to negotiate the price, closing costs, escrow length, or other financing concessions.
- You can use a traditional VA, FHA, or USDA loan to buy a foreclosed home.
- Foreclosed homes provide you an opportunity to purchase a home in a neighborhood that you otherwise may not be able to afford.
- If you buy it for the right price and stay on your budget with repairs you will build up instant equity.
- As foreclosed homes have a lower property price, they have great potential to generate a high return on investment.
- If you purchase a foreclosed home with a mortgage you will have the benefit of a lower down payment and lower monthly payments.
- If it is an REO property the home’s title will be clear, so you will not have to take on any liens or back taxes responsibility from the ex-owner. The house will be vacant and you could also have a house inspection.
Purchasing a foreclosed home does have many benefits but there are also some pitfalls that you need to consider.
- When you purchase a house at a foreclosure auction you may need to buy it as is. This means that you cannot do any home inspections. That is why buyers go for bank- owned properties (REO) with a condition that the home passes an inspection.
- These properties may need extensive repairs or improvements as ex-owners may not have had the incentive or money to spend on maintaining a home as they know they are going to lose it to foreclosure. They may also damage the property intentionally as a way of getting back at the bank.
- If a house in the pre-closure is approved for short-sale the closing process can be lengthy.
- When you buy a foreclosed home at an auction you will have to pay the full bidding price before you take control of the deed. You may just need to make a down payment at first but you will need to pay the rest of the amount shortly after that. So, getting a mortgage may be difficult as appraisals and underwriting processes take some time.
TIPS TO BUY A FORECLOSED HOME
Is buying a foreclosure the right choice for you? If the pros outweigh the pitfalls and you are ready to jump the bandwagon of foreclosure investing, here are some tips that will help you prepare yourself before you buy.
- Hire a real estate agent specializing in foreclosures: This is the best thing you can do as they are professionals who can help you look for foreclosure properties that meet your criteria, navigate the buying process, negotiate your price and make an offer.
- Run a CMA before making an offer: Making a competitive offer is very important. You can ask your agent to run a CMA (comparative market analysis) to help you determine the value of the home you are buying and its potential for making a profit.
- Do your math: When you decide to purchase a foreclosed home you should get a professional home inspection done so that you can get an accurate assessment of repairs and expenses the home will require.
- Check the home appreciation Rates: No doubt repairs and renovations will increase the ROI (return of investment) of your property. However, you need to take into account other factors that can contribute to the property’s increase in value over time like the land value, location, amenities, public transit, utility lines, and facilities in the area.
- Avoid a foreclosure auction: Even though buyers are guaranteed to find low priced homes at a foreclosure auction, they are not the best option as you will have to purchase it “as is”. This means that you do not get to perform a home inspection which can lead to a bad investment decision. However, if you go for a bank-owned property (REO) you usually get an opportunity to view the home and get an inspection done before you close.
- Get pre-approved for a loan: If you are going in for a mortgage loan then you will need to get a pre-approval letter in hand to make an offer on a foreclosure. So once you start looking for homes choose a mortgage lender who understands your goals and get together the required paperwork to get pre-approved for the loan. This proof of funds will make the mortgage transaction easier.
There are always benefits and pitfalls that one has to consider when buying any type of investment property. But, if you are aware of the pitfalls and have all the information you need a foreclosed home can be a wise buying decision that can lead to big savings.